The seemingly unrelenting growth in natural gas use in Asia-Pacific nations could have global implications for gas pricing that heretofore has varied greatly between the East and the West, two Singapore-based energy attorneys said during an energy conference Tuesday.

As a result, there may eventually be less emphasis on the oil-based pricing of liquefied natural gas (LNG) that is popular in Asia, more consistent price review provisions in LNG contracts, and an increased spot market for LNG, according to Dan Rogers and Merrick White, energy transaction specialists at King & Spalding LLP, who spoke at the Infocast webinar, “The Evolving Asian-Pacific Gas Market” (see Daily GPI, Jan. 24).

Traditionally, North and South American LNG has been priced by indexes tied to Henry Hub, while in Europe prices have been based on a national balancing point index. In other parts of Atlantic trade, prices are based on a fuel oil index, and in the Asian region prices are tied to an oil-based index, or Japanese Crude Cocktail (JCC).

“There is really no uniform gas-pricing index,” Rogers said. “Until only very recently, by and large, Asian pricing has been very much tied to the JCC, although we have seen a few contracts use a Brent index.”

Even more recently there have been a couple of LNG deals that were solely based on the Henry Hub index, he noted, adding that the supply sources in those cases are in the United States.

It remains to be seen how many Asian buyers in the future — when they renegotiate LNG contracts — will move away from JCC-based to Henry Hub pricing.

“What we are hearing in the marketplace is that [some suppliers] are tying a portion, but not all, of their LNG contracts to Henry Hub,” Rogers said. “On the other hand we are hearing from a lot of buyers that they are not interested in discussing anything but full Henry Hub indexing, so there are going to be some interesting discussions.”

While there is a lot of “multi-layering” of pricing between the premium prices being paid by the Japanese and the low-end, shale-driven Henry Hub prices, it isn’t clear over the long haul which direction overall pricing will go, said Rogers, who noted that “there is nothing magic about Henry Hub, other than it’s the lowest in the world today because of the shale gas boom.”

White said there are some “price shocks” coming on the global market from the shift of several Asian exporting nations, such as Indonesia and Thailand, to become major importers as well. For example, Indonesian domestic gas supplies are priced at $6-$7/MMBtu while the nation is importing at $7-$14/MMBtu.

The pricing dynamics and lack of uniformity are adding to the complexity of contracts. “In the LNG sector particularly, there are now much, much more detailed price review clauses in contracts, and I think that is a good thing,” Rogers said.

“As there are increased pressures to change pricing indexes to maybe a market basket of indexes, LNG prices are going to go in a number of different directions, and once they sort themselves out and we see where past contracts are relative to the rest of the market, a properly drafted price review clause might be a good mechanism.”

In this way, he said, if a particular pricing index doesn’t work out, the review clause provides a way to adjust the situation in a legally binding manner. “That being said, it is becoming harder and harder to draft the proper pricing review. “

Diversion clauses, the variety of indexes and other factors make it increasingly hard to compare contracts on a true apples-to-apples basis, Rogers said.

The wider, deeper global market for LNG brings up the question of whether the fuel being transported all over the world is a true commodity, and White and Rogers have concluded it is headed in that direction, but it hasn’t arrived yet. There has been an increase in trading activity, they said.

Traditionally, spot trading has been less than 10% of the world LNG market, and now it is roughly double, or about 20% of the total LNG business. On the other hand, 80% of the market is still point-to-point — not spot.

An indication that LNG is headed more in the commodity direction is the fact that there are more standard, accepted LNG trading contracts, Rogers said. “All of these are positive developments that are going to result in a much easier LNG trading environment, taking some of the risks out of being in the middle of these trades.”

White said the development of a Singapore LNG terminal is a very important development. “It is a terminal being developed with trading in mind, offering spare storage capacity and reloading services,” he said. “Some of the spot indexes are looking at creating a Singapore LNG price.

“So the framework, the basic tools needed to trade large volumes have started to come together, and Singapore is taking the lead of this,” he said.

©Copyright 2013Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.